JANEK SKARZYNSKI/AFP/Getty Images
Grupa Lotos refinery in Gdansk, Poland
Like
most Central and Eastern European countries, Poland depends heavily on
Russia for energy supplies. Similar to its strategy concerning other
European countries, Russia uses this dependence as a political tool and
in the past has implemented energy cutoffs and politically motivated
pricing mechanisms to exert its influence in the region. However,
diversification efforts in Poland and policy changes in the European
Union likely will affect Russia's position in Poland's energy sector, as
well as Russia's political heft in both Poland and the wider region.
Poland is in a better position than many other Central and Eastern
European countries concerning energy production. Poland is a major coal
producer, and coal comprises a significant portion of Poland's primary
energy supply. The country also has some domestic natural gas
production, whereas many other Central and Eastern European countries
rely completely on Russia for natural gas. However, Russian oil and
natural gas imports amount to nearly half of Poland's primary energy
supply, and these inputs are set to grow as Polish energy demand
increases and Warsaw continues to diversify away from coal for numerous
reasons.
Still, Poland is unique in Central and Eastern Europe in that it is
following through with significant diversification projects, such as the
construction of a liquefied natural gas (LNG) import terminal. Poland
also has the potential to further diversify through shale gas resource
development (though prospects for this are much less clear).
A breakdown of Poland's energy supply is necessary in order to
accurately gauge Russia's influence in the sector and add context to
Warsaw's diversification efforts.
Historically, coal has been the most important energy source in
Poland. The country's three largest coal-mining companies -- Weglokoks,
Kompania Weglowa and Jastrzebska Spolka Weglowa -- extract approximately
100 million tons of coal per year. Coal makes up more than 50 percent
of Poland's primary energy supply and roughly 85 percent of the
country's electricity generation. However, diversification away from
coal to natural gas and other energy sources in order to meet the EU
environmental standards is becoming a priority for Warsaw.
Oil is another important energy source in Poland, comprising 26 percent of the country's primary energy supply. Poland's
demand was 535,000 barrels per day in 2009. The country imports almost
all of its crude oil, including 94 percent from Russia, mainly via the
Druzhba pipeline. Poland depends less on Russia for refined products,
however, importing roughly 25 percent. Poland has six refineries, with
PKN Orlen and Grupa Lotos the major Polish companies responsible for
refining and fuel stations.
Poland's third major energy source is natural gas, which makes up 13
percent of the country's primary energy supply and 3 percent of its
electricity generation. Poland produced 5.9 billion cubic meters (bcm)
in 2009, or 37 percent of the country's total demand of 15.8 bcm. PGNiG
is the main Polish natural gas company, responsible for 98 percent of
domestic natural gas production while serving as Poland's only natural
gas importer, only operator of the country's underground natural gas
storage capacity and effective controller of the wholesale natural gas
market.
Although natural gas is the smallest major energy input in Poland, it
is in many ways the most strategic to the region. Unlike oil, natural
gas cannot be delivered via tanker unless it is liquefied, which limits
the number of suppliers in Central and Eastern Europe. Currently there
are no operational LNG terminals in the region, so the only regional
delivery method is through pipeline. And the current pipeline
infrastructure dictates that the dominant natural gas supplier for
Central and Eastern Europe -- including Poland -- is Russia.
In 2010, Poland imported 10 bcm of natural gas from Russia, or 82
percent of Poland's imports, via the Yamal pipeline. An additional 1 bcm
(11 percent) is Russian natual gas transited through Germany, meaning
that Poland depends on Russia for virtually all of its natural gas
imports. This dependence is expected to grow; PGNiG signed a ten-year
contract with Russian energy giant Gazprom in October 2010 to import 11
bcm starting in 2012. The deal also made Polish State Treasury-owned
Gaz-System -- established in 2004 as an independent transmission system
operator as a result of PGNiG's unbundling -- the operator of the Yamal
pipeline in Poland (Gaz-System previously owned and operated all the
natural gas transmission and distribution pipelines in Poland except
Yamal, which was previously owned by EuRoPol Gaz).
As Poland has sought more energy independence from Russia, Warsaw has
begun pursuing two key areas of energy diversification: LNG and shale
gas.
LNG is Poland's primary diversification priority in the near to
mid-term. The first LNG import terminal in Central and Eastern Europe is
under construction in the northern Polish town of Swinoujscie. Polskie
LNG, a subsidiary of Gaz-System, is constructing the terminal and will
operate it upon its 2014 completion. The terminal will have a capacity
of 5 bcm, with the possibility of expansion to 7.5 bcm at a later date.
The terminal will allow Poland to access numerous LNG providers and
purchase natural gas that is roughly $100-150 per thousand cubic meters
(tcm) cheaper than Russian natural gas (industry estimates for LNG are
currently in the $290-$350 per tcm range, while Poland pays $500 per tcm
for Russian natural gas). PGNiG and Qatargas signed a 20-year agreement
in 2009 for the purchase of 1.5 bcm per year beginning in 2014. While
long-term contracts such as the Qatargas deal are the traditional mode
of sale for LNG, Poland likely will reserve the option of spot
purchasing as well. The Swinoujscie terminal's 5 bcm capacity could
nearly halve Poland's dependence on Russia for natural gas in the next
few years, significantly contributing to Poland's energy
diversification. However, this assumes that the country will use all 5
bcm to cut imports from Russia and that demand will not grow, both of
which are unlikely. But, while it might not fully shift the energy
balance, the terminal will certainly lessen the pressure Poland feels
from Russia and the leverage Moscow has over Warsaw.
In the longer term, Poland is focused on developing its
unconventional natural gas resources, including shale gas. Since shale
gas development began in Poland in 2009, more than 100 concessions have
been issued to both domestic companies and larger international
companies such as ExxonMobil, Chevron Corp., ConocoPhillips and
Marathon. Preliminary estimates suggest that Poland could have 1.4-5 tcm
of shale gas, the development of which could change Poland's energy
situation dramatically.
However, there are numerous obstacles to the commercialization of
shale gas -- including capital intensiveness, environmental concerns and
the proximity of resources to existing distribution infrastructure --
and early testing and drilling has not been a smooth process. ExxonMobil
reported in early February that two initial wells undergoing
exploratory drilling had "insufficient amounts of gas" for commercial
exploitation. However, ExxonMobil subsequently said it would drill
another six wells, demonstrating its commitment to the process.
Similarly, PGNiG is boosting upstream investment in shale development,
and there have been some promising early results from companies such as
Dublin-based San Leon Energy.
A recent corruption scandal about the shale gas concessions awarding
process led to charges filed against several government officials, but
the incident is unlikely to hamper development since the resource is
broadly popular with the Polish public. Its popularity is rooted in the
potential for shale gas to become a strategic boon for Poland.
Development could rid the country of its dependence on Russia and
possibly make Poland a natural gas exporter to other Central and Eastern
European countries, thus contributing to Poland's role as a regional
leader. But shale gas development is a long-term process that -- unlike
LNG -- does not have a set date to come online, and it could prove
unprofitable.
Source - Stratfor
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